The Use and Abuse of Aggregate Demand and Supply Functions
Author(s)
Nevile, J. W.; Bhaskara Rao, B.
Abstract
The ISLM graph, which represents aggregate demand and supply functions in economics textbooks, has several weaknesses as it often uses contradictory assumptions. The most serious problem arises when ISLM is used into a model with a long-run full employment equilibrium. The aggregate demand curve is based on the assumption that the labor market is a fix price market. However, a contradictory assumption of the aggressive supply curve holds the market to be a flex price one.
